The U.S. Federal Reserve has raised its benchmark interest rate for the second time this year, maintaining a gradual pace of increases aimed at keeping the U.S. economy from overheating.
The Fed on Wednesday lifted the federal funds rate, which helps determine rates for mortgages, credit cards and other borrowing, to a range of 1.75% to 2%. A majority of policymakers said they now expect a total of four rate hikes this year, up from the three that were originally expected.
Jerome H. Powell, the Fed chairman, said the economy had strengthened significantly since the 2008 financial crisis and was approaching a “normal” level that could allow the Fed to soon step back and play less of a hands-on role in encouraging economic activity.
“The decision you see today is another sign that the U.S. economy is in great shape,” Powell said after the Fed’s two-day policy meeting. “Most people who want to find jobs are finding them.”
The last time the federal funds rate topped 2% was in late summer 2008, when the economy was contracting and the Fed was cutting rates toward zero to stimulate the recovery from the Great Recession.
This year’s rate increases “reflect both the Fed’s confidence in America’s economic strength and its commitment to bring the inflation rate to its target of 2 percent,” The New York Times said.
The Fed’s preferred measure of inflation, the core personal consumption expenditures index, was up 1.8% year-over-year in April, but economists expect it will top 2% by the end of this year.
In a statement, Fed policymakers noted that the labor market “has continued to strengthen and that economic activity has been rising at a solid rate.” But the Times said some analysts believe the Fed should slow their pace of rate increases because “the benefits of a hot economy have not yet translated into a significant wage increase for workers.”
“Too many increases too quickly could choke the economy before we really see how good it could get,” Tara Sinclair, a senior fellow at the Indeed Hiring Lab, wrote in a research note.